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New Zealanders work longer hours than the average of their peers in other developed countries but produce a fifth less, according to a Productivity Commission report that finds little evidence the situation is improving.

The report suggests low-productive economies in theory catch up to those on the 'frontier' or leading the charge as new technologies, capital and ideas flow across borders. But that hasn't been the case for New Zealand.

"At the aggregate level, New Zealand's productivity performance shows no evidence of catching up, with labour productivity declining relative to other OECD countries for a number of decades," the report says. "So despite having one of the lowest levels of labour productivity in the OECD in the 1980s, labour productivity growth in New Zealand has still been among the lowest."

The report doesn't make any recommendations and meant to "set the backdrop" for the ongoing work of the commission "which aims to address the causes underlying New Zealand's productivity performance."

It notes data showing that since the early 1990s, labour productivity growth has accounted for over half of New Zealand's average income growth. Further improvements in labour productivity will be needed going forward, given labour market participation "has a natural limit" and is already high by international and historical standards.

"Given an aging population, this suggests that raising average incomes via increased labour input is becoming progressively more difficult," it says. "Improvements in the terms of trade, which have contributed about 30 per cent of average income growth over the 2000s, are unlikely to continue increasing indefinitely."

A growing gap in labour productivity has been the main driver of increasing disparity in GDP per capita between New Zealand and Australia, the report says. While growth in labour input over the past four decades has been "remarkably similar" Australia has outperformed, with Australia's real GDP in 2011 being 4.4 times higher than in 1967 while for New Zealand the improvement was only 2.8 times.

Of 10 industries where New Zealand's labour productivity levels were lower than Australia's in 1997, only three had caught-up or narrowed the gap by 2010 - other services, information media and telecommunication and manufacturing.

"Labour productivity growth in New Zealand has been below the average of available OECD countries in all but three industries over recent years despite a large and growing levels gap in labour productivity at the aggregate level," the report says.

"This on-going divergence in New Zealand's labour productivity, with no sign of productivity 'catch up' towards more productive countries is unusual within the OECD group of countries and raises serious concerns about the extent to which new technologies and work practices developed off-shore diffuse into the New Zealand economy," it says.